FUNDAMENTAL TAX REFORM Download a pdf of this summary toFAIRSHARETAXES.ORG mail or fax to friends, media, politicians.
WEBSITE AND ESSAY SUMMARY
The Working Poor, The Middle Class, Our Nation's future as a force for the good in the world ... all are under threat. The bottom half in the United States now owns only 1% of the nation's wealth, while the wealthiest 1% of households owns nearly 40% of the
nation's wealth (up from 22% in 1980). Simulations indicate that our regressive tax system
accounts for much of this damaging economic inequity. In 2006, under our current tax system, Warren Buffett,
then the world's third-richest man, paid total taxes (federal, state,
municipal, corporate and other indirect) that amounted to 11% of his $8 billion
income and investment gains. A typical single, minimum-wage worker paid a total
tax rate of 37% on her $14,500 annual salary, more than triple Mr. Buffett's
rate. A typical widow living off of Social Security pays 30% of that income in typical property, sales and gas taxes. Mr Buffett paid less than 2% of his net worth (accumulated wealth) in taxes, while the minimum-wage worker paid almost 600% of her net worth.*
Consider the finances of two more
typical hypothetical families for a single year. In the middle-class family of
four, both parents worked. They had an annual income of $73,000, spent $50,000,
and paid about $28,300 in total taxes. The millionaire couple does not
work, made $157,000 in investment income and gains, spent $100,000, and -
without contriving any unusual circumstances or applying any tax “loopholes” -
paid total taxes of only about $31,500, including about $18,000 in indirect
corporate taxes. (Again, throughout "total taxes" means direct
federal, state, municipal, income, payroll, sales, excise and property taxes as
well as indirect taxes, like corporate and employer-paid payroll taxes. For
detailed calculations, see "Four Taxpayers Data"
and the "Tax Reform Essay" at the website: http://fairsharetaxes.org ) Considering
each family’s total annual tax bill:
· The
middle-class family paid a total tax rate per dollar earned through work that
was about 2 times greater than the millionaires’ tax rate per dollar of
investment income and gain (39% vs 20%).
· The
middle-class family paid a total tax rate per dollar of net worth that was
about 30 times greater than the millionaires’ tax rate per dollar of net worth (49% vs. 1.6%).
· [Suspicious
of the indirect tax calculations? Consider direct taxes only: The middle-class
family paid about $20,800 in annual direct taxes, 3.5-fold more dollars than the roughly $5900 paid by the millionaire
couple. Warren Buffet paid direct taxes that were much less than 1% of his $8 billion investment gain.]
The above illustrates that the
system of taxes in the United States is grossly inequitable. When our multiple
taxes are totaled and compared to all types of income, including investment gains; the total taxes are neither commensurate with ability to pay nor the
degree to which the wealthy have benefited from the economic infrastructure
that our governments (i.e. all taxpayers) provide. In addition, the
current tax system:
· Contributes
to the vicious cycle that concentrates wealth and political power in a very small
investing class, threatening our democracy.
· Distorts
relative incentives, favoring private investing gains over work wages and
private consumption, leading to too many investment dollars chasing too few
worthy investments .. market forces overwhelm any financial regulations ..
investment bubbles in the setting of reduced consumption .. repeated recessions ..
financial hardship for all but the wealthiest, threatening our survival as a nation.
· Leads
to marked economic inequality, which academic studies have associated with (at
all socio-economic levels) worse health and mental health, higher infant mortality, lower life
expectancy, increased substance abuse and incarceration rates, reduced
innovation, reduced societal trust, and other societal ills.
· Impedes
social mobility, which reduces the likelihood that each person has the means to
reach their full potential, which in turn hobbles the economy, weakens
the nation, and impedes progress toward a better world.
· Fails
to compensate for price distortions, and so activities that have a high cost to
society and government (all taxpayers) do not have those costs reflected in the price paid by
consumers (e.g. fossil fuel use, cigarette smoking, unhealthy foods).
· Underfunds
governments, leading to neglect of national priorities that would improve and
save lives and ensure prosperity for future generations (e.g. education, health-care, environmental
protection, basic research, infrastructure, international aid).
· Underfunds
governments, leading to a ballooning of the national debt, which enriches
competing nations at the expense of current and future taxpayers and reduces
credit available to the private sector. [In addition to tax increases, spending
cuts (especially controlling military and health-care costs), are needed reduce
this burden on future generations.]
· Is
complex, expensive, opaque, and difficult to administer and comply with,
costing taxpayers billions of man-hours and hundreds of billions of dollars
annually simply to file tax returns. Many of the taxes individuals ultimately
pay are hidden as indirect taxes (e.g. Corporate taxes are ultimately paid by workers and consumers as well as investors.)
If taxes are to be made
commensurate with ability to pay, then the net worth - as well
as income - must be taxed. The essay describes a first-pass effort to design a
fair, simple tax system that mitigates each of the problems outlined above. The
proposed tax reforms consist of: 1) eliminating all payroll (Social
Security, Medicare), capital gains, sales, property, estate, and corporate
taxes; 2) reforming Income and Excise Taxes; and 3) instituting a household
Net-worth Tax. (For technical details, tax formulas, tax forms, etc., see
"Proposed Reform" and "Tax Form" pages at the website: http://fairsharetaxes.org ) All
federal, state, and municipal government services and programs would be paid
for entirely with the combination of:
· A
reformed, simplified Federal Income Tax of 20% rate on all income
and other compensation above realistic poverty line (e.g. $25,000 for a couple-income under that limit taxed at 2%) with
deductions only for certain large medical expenditures and contributions to tax-free accounts (automatic with opt-out). For typical families of three, the
effective federal income tax rate would be 10% for an income of $60,000 and 19% for an income
of $1 million. Instead of the corporate tax, corporations and businesses are required to distribute 70-95% of actual
profits as dividends, which are taxed at the same rate as other income. Social
Security and Medicare are paid out of general revenue.
· A
new Federal Net-worth Tax on net worths over about $500,000 to $900,000 for typical
families, so that the effective federal tax rates would range from 0.2% ($2000 tax) on a typical household net worth of
about $1 million up to 2.0% on a net worth of $30 million or more. This tax replaces current property, capital gains, and estate taxes. Only the wealthiest roughly 12% of households would be subject
to the Net-worth Tax.
· A
6% War Tax surcharge on the Federal Income and Net-worth Tax (a $10,000 tax
bill increases to $10,600) during any year the nation is at war.
· Funding
of state and municipal governments entirely through a surcharge on each
household’s combined Federal Income and Net-worth Tax, with the surcharge rate
set by each state and municipality.
· Retain
and increase excise taxes only on activities that society would like
discourage, such as fossil fuel, cigarette, and unhealthy food purchases. [For poor and
middle-class households, this would be much more than offset by the reduction
in their other taxes. For activities that society would like to promote, such as education and saving for retirement, a
single unified tax-free account with a modest cap is established for each adult
unless they opt out.]
Under the proposed tax system,
about 80% of taxpayers would have their total taxes reduced substantially. This
essay’s hypothetical working, middle-class family’s total tax bill
(federal, state, and municipal) would have been reduced from about $28,000 to
about $18,000. The investing-class millionaire couple’s total taxes would have
increased from about $32,000 to about $57,000. These tax reforms, combined with spending cuts that would rein in the current unrestrained transfer of
taxpayer dollars to the medical and defense industries (see Spending and Debt pages
at the website), would produce small federal, state and municipal budget
surpluses by 2015 and could eliminate the national debt in about 30 years. Under the plan, the economy would flourish, to the benefit of everyone: poor, middle-class, and
wealthy alike.
Peter Gloor
For more, see: http://fairsharetaxes.org - see the full essay there